Daijiworld Media Network - New Delhi

New Delhi, Sep 29: Rising crude oil prices, inflation and higher global bond yields have narrowed the Reserve Bank of India's room to keep interest rates unchanged, according to a report by BNP Paribas India.

The report said India's macroeconomic outlook had weakened in recent weeks as Brent crude prices climbed above $100 per barrel and US 10-year Treasury yields moved towards 5 per cent.

Global inflation has also continued to rise, prompting central banks to resort to interest rate hikes. While India's macroeconomic buffers have strengthened due to foreign currency non-resident (FCNR) inflows, the risk of capital outflows has increased as developed economies tighten monetary policy.

"In our view, rising oil prices and commodity inflation remain a material challenge for India in the near term. The INR has already depreciated by nearly 1 per cent and the RBI now has less room to keep interest rates unchanged," the report said.

The latest escalation in the Middle East has pushed Brent crude above $100 per barrel, while the European Central Bank (ECB) and Bank of Japan (BoJ) have raised rates by 25 basis points, further tightening global financial conditions and increasing capital-flight risks for India.

"India's macro-outlook is sensitive to oil prices, and the latest escalation in the Middle East is a negative," said Kunal Vora, Head of India Equity Research.

The report noted that the rupee had depreciated by around 1 per cent over the past two weeks, while India's 10-year bond yields crossed 7 per cent. Foreign institutional investor (FII) selling has also resumed.

At the same time, FCNR deposits have helped strengthen India's foreign exchange reserves to around $800 billion, supported by approximately $127 billion in FCNR flows.

The report said these inflows provide near-term relief but are likely to reverse over a period of three to five years. It also cautioned that elevated inflation could weigh on high-frequency economic indicators in the coming months.

"India's macro indicators have remained resilient, but the outlook is weakening due to rising oil prices and inflation. Key positives are strong credit growth, strong auto sales, improving jobs data and large food-grain holdings, which provide a shield against El Nino," the report said.

Consumption indicators showed some moderation during the previous month, with urban wages declining amid rising inflation and weakening business confidence.

Rural economic conditions have also come under pressure due to the monsoon deficit, higher food inflation and reduced crop sowing, the report noted.